SIMPLY REINSTATING RULE OF LAW AND RECOVERING THIS FRAUD WOULD PAY OFF THE NATIONAL DEBT AND MAKE GOVERNMENT COFFERS AT ALL LEVELS FLUSH WITH MONEY.
The citizens of America and our government are not impoverished----we've been looted and we have politicians in office protecting that stolen money. That is what neo-liberals and neo-cons do----they work for corporate profit and wealth at the expense of labor and justice. Do you hear your incumbent or candidate shouting---RECOVER TENS OF TRILLIONS OF DOLLARS IN CORPORATE FRAUD? NOT A PEEP IN MARYLAND.
ALL CANDIDATES FOR GOVERNOR OF MARYLAND ARE NEO-LIBERALS AND NEO-CONS EXCEPT CINDY WALSH FOR GOVERNOR.
I am not even touching the surface with these posts as fraud hits every industry in the US. My mention of the subprime loan fraud and the banking industry does not even mention the tens of trillions of dollars in all kinds of other financial frauds this past decade-----THE NUMBERS ARE HUGE.
Remember, all your pols know these frauds happened.....they know recovery is not that hard......and they know the people charged with justice----the Maryland Attorney General Gansler and Governor O'Malley for just two-----are aiding and abetting these crimes. YET THEY GET THE STAGE AT ELECTION FORUMS AND DEMOCRATIC EVENTS!
OH, THAT'S WHY CINDY WALSH FOR GOVERNOR OF MARYLAND IS NOT ALLOWED IN ANY OF THE REINDEER GAMES!
HEALTH INDUSTRY FRAUDS IN THE TRILLIONS OF DOLLARS LAST DECADE
Let's take a look at what both government watchdogs and public policy organizations calculate to be a conservative look at how much money was stolen and from which agencies. Since I just spoke of health care and corporate universities, below you see the health care fraud for the health industry at $200-400 billion each year.....that is billions of dollars stolen from Medicare and Medicaid in Maryland each year. Which hospitals handled most of these patients? Johns Hopkins and UMMS in Baltimore. It does not take a rocket scientist to know the institutions handling most of the poor and seniors is where these frauds occur. Padding fee for service is rampant and happening all over Maryland but it is not fee for service that is the problem as much as the fact that there is absolutely no oversight and accountability in these Federal programs. They are being allowed to be gutted with fraud.
So, as your neo-liberal in Congress, the Maryland Assembly, or Baltimore City Hall pretend they have to gut social services, public services, public employees and their pensions and wages.......WE ALL KNOW IT IS THE FRAUD AND CORRUPTION. THIS IS WHY CINDY WALSH FOR GOVERNOR OF MARYLAND IS NOT MENTIONED AT ALL IN THIS PRIMARY! All the other candidates are involved in this system and will keep the status quo and that is why they have the place in the media.
Below you see a well-researched paper on health fraud. Notice that the amount of fraud back in 1998 was $250 billion a year.....THAT WAS BEFORE CORPORATE FRAUD WENT ON STEROIDS IN THE 2000s
'It is clear to see why Americans consider this the biggest cause, when health care fraud was estimated to cost approximately $100 billion to $250 billion per year in 1998, or 10 percent to 25 percent of total health care spending'
An Undergraduate Honors Thesis by
Health care fraud is an important and visible factor associated with increasing health care costs in the United States. Medicare and Medicaid contribute to a vast majority of those cost sand therefore must be heavily scrutinized. This thesis will investigate the types of fraud, who commits them, and why the health care system is more susceptible to fraud. More specifically, the problems and complications of current fraud investigation for Medicare and Medicaid are examined. This thesis will then evaluate how successful these initiatives were in reducing health care fraud and explore new suggestions for preventing health care fraud in the future.
The amount of fraud in the subprime mortgage fraud was in the trillions and we have received a few hundreds of billions in settlement----I should say the US Justice Department settled for that much and much of the money was sent right back to those committing these frauds and not those defrauded. The point was at the time of this first settlement that $25 billion was a postage stamp of a settlement meant only to try to keep the public from continuing legal recourse for the rest of the fraud. Maryland was ground zero for this fraud as we are still seeing the repercussions across Maryland and the major tool for the fraud, MERS operated right here in the Washington suburbs of Maryland and Virginia. It was a Maryland court that ruled MERS did not break law when EVERYONE KNOWS MERS BROKE LAW. This ruling simply needs to be appealed to ever higher courts to negate that corrupt ruling.
The thing to remember is those developing this massive scheme targeted low-income specifically for the availability of taxpayer-backed FHA loans that had taxpayers paying all kinds of attorney fees, title fees, down payments----the whole nine yards on loans everyone knew would fail. At each stage fraud and corruption was involved no matter how much they tell you it cannot be proven or an individual cannot be found----THE EVIDENCE IS ALREADY COLLECTED AND INDIVIDUALS HAVE BEEN FOUND. THE POLS ARE LYING TO YOU AND ME.
Maryland is a mess because this fraud was allowed to go wild even as 50 states attorney general shouting this mortgage system was full of fraud back in 2005. All that had to be done is for government officials to educate and warn people to stay away----instead the marketing increased. This was O'Malley working for Baltimore Development and Johns Hopkins in Baltimore as these frauds had a second goal----clearing out the urban center of working and middle-class homeowners so big developers could own all real estate----which is what is happening now.
TRILLIONS OF DOLLARS IN SUBPRIME MORTGAGE FRAUD HAS YET TO BE RECOVERED AND THAT IS BILLIONS OF DOLLARS FOR MARYLAND ALONE.
New Fraud Evidence Shows Trillions Of Dollars In Mortgages Have No Owner
By Alan Pyke on August 13, 2013 at 2:57 pm
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Share on email Thanks to forged documents, banks can’t prove that they own trillions of dollars in mortgages, according to recently unsealed court documents relating to a lawsuit the government decided to settle out of court for $95 million in 2012. The evidence gathered by Lynn Szymoniak, a Florida resident who fought off a wrongful foreclosure after three years of legal wrangling, could invalidate ownership claims to the homes in question. Yet foreclosures based on these documents continue to be approved.
The unsealed documents indicate Szymoniak, whose career as an insurance fraud investigator may have helped her piece together the complex web of documentary evidence, found invalid documentation underlying at least $1.4 trillion in mortgage-backed securities. The “robosigning” form of mortgage fraud – where banks forged documents that are legally required to transfer the ownership of a given mortgage – was ostensibly settled in the 2012 National Mortgage Settlement. Szymoniak received $18 million for her role as an expert whistleblower who helped build the pool of evidence used to achieve settlements over robosigning and retained the ability to press ahead to a trial with the banks that weren’t party to the government’s settlement, which she plans to do.
Other evidence of widespread mortgage fraud has recently surfaced. Researchers looked at just one mortgage lender that was a major player in the subprime bubble. They found fraudulent misrepresentations of 9 percent of all loans sold off to financial firms seeking to package up loans into mortgage-backed securities, and in 93 percent of those misrepresentations, the lender knew it was lying about the nature of mortgages it was passing along. The researchers stress that the actual fraud rate is likely higher, as they only searched for two specific forms of misrepresentation.
Despite the growing mountain of evidence of fraud in both mortgage securitization and foreclosures, the federal government’s response has been feeble. The 2012 settlement has failed to stop bank abuses. A much-touted program to provide relief to homeowners failed to serve nearly as many as intended, and half of the mortgages modified under it are back in default. And over the weekend, the Justice Department admitted it had dramatically inflated its successes in a yearlong task force targeting mortgage abuses.
The entire online college business is one big fiasco meant to undermine the US higher education system that is ranked #1 in the world but is failing because of defunding and privatization schemes like this one. Maryland is ground zero for these online colleges that simply have as a goal of forcing 80% of Americans into a substandard system of higher education that is cheap and poor quality.......which is why most students drop out!
If you listen to Maryland's data it will no doubt say these online courses are thriving because-----all data in Maryland is skewed.
Harvard, MIT Online Courses Dropped by 95% of Registrants
About 95 percent of students enrolled in free, online courses from Harvard University and the Massachusetts Institute of Technology dropped them before getting a completion...
The amount of for-profit education fraud is also in the trillions and it is infused with millions of student loans that are now subjecting these students to predatory education loan collection. These students were lured to these programs and government officials knew they were bogus and allowed trillions of education dollars be funneled into these fraudulent programs and now they say-----there's no money for higher education funding for financial aid and grants for the working and middle-class students.....BECAUSE TRILLIONS OF DOLLARS IN FOR-PROFIT EDUCATION FRAUD HAS NOT BEEN RECOVERED! Our students are being held captive to fraudulent loans and Obama has the US Department of Education run by Wall Street collection contractors.
I want to emphasize that none of what Obama and neo-liberals in Congress said would happen in accountability happened. In Maryland all of these for-profits listed in this article are still filling the Maryland airwaves with advertisements and have facilities operating and no accountability has happened. Instead, Maryland citizens are straddled with this fraudulent student debt and our government revenue stolen in the trillions of dollars!
The article below is long but please glance through!
'The for-profit predatory colleges, in their mad dash to suck up as much as they can in Title IV funds, Pell grants, and other government subsidies, thus enriching their investors at the expense of students, prey on and then wolf down the most disadvantaged students they can find'.
Neoliberalism and the For-Profit, Predatory Educational Industry: You Can't Regulate a Criminal Enterprise
Thursday, 23 September 2010 11:55 By Danny Weil,
t r u t h o u t | Report | name.
You might have been following Secretary of Education Arne Duncan and his department's attempts to reign in the for-profit universities and colleges for their criminal activities. Perhaps you recognize some of these for-profit universities and colleges, for they are well known due to their marketing and are heavily traded on the stock market - DeVry (ticker: DV), Grand Canyon Education (LOPE), as Apollo Group (APOL), ITT Educational Services (ESI), Kaplan (WOP) and Strayer Education (STRA). There are literally thousands of these schools in existence and most are online schools with office fronts that act as administration centers for the whole for-profit syndicate.
The Department of Education (DOE), after a 2010 Government Accounting Office (GAO) sting operation that unveiled the vile tactics of 15 of these predatory institutions, says it wants to adopt new regulations that would rein in the for-profit educational industry. Yet, this is not the first time the "industry" has been caught with its pants down and its fists full of dirty money. Earlier, in 2009, another GAO investigation was launched and similar acts of criminality were found (United States Government Accountability Office, Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid, August 2009,).
Under Title IV of the Higher Education Act, any school can receive federal taxpayer funds in the form of student aid if it offers courses of study such as certificates, associate degrees, bachelor degrees, graduate degrees or professional degree programs. Proprietary schools offer a small percentage of bachelor degrees, but a substantial percentage of certificate degrees. Overall, the proprietary sector receives the smallest percentage of Title IV funds, 19 percent, as compared with the public and nonprofit, which is 48 percent and 33 percent, respectively. Although the majority of enrollees in these colleges are in four-year programs, the two-year proprietary schools account for a significant percentage of the proprietary customer base.
The Crime Scene
Before we discuss the proposed new regulations due to take effect on November 1, 2010, it is important to understand the for-profit college and university venture industry as a virtual crime scene. For that is what it is. When one begins to think about the for-profit educational industry as a larcenous crime scene then it becomes ludicrous to even consider regulations of what are criminal acts; at the same time, it also becomes apparent how the for-profits work, and the human lives they decimate and destroy in the name of education when their sole motive is profit.
Any "cop on the beat" knows that when a crime scene is found, the first thing that is necessary is to put yellow tape around the area so that no evidence is tampered with and the crime scene can remain "clean and intact" for purposes of critical investigative scrutiny. Imagine yourself a detective arriving on the for-profit crime scene. The yellow tape is all around the "industry" carnage and now you must bend down and get yourself under the yellow tape and enter into the crime zone in an attempt to gather and bag evidence, obtain information and collect any clues as to how the perpetrators operate and who they might be. Looking around inside the circumference of yellow tape, one sees the following evidence of larceny, fraud, misrepresentation and theft:
- Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded, higher education companies derive three-fourths of their revenue from federal funds, with Phoenix University at 86 percent, up from just 48 percent in 2001 and approaching the 90 percent limit set by federal law. And the fact of the matter is that, although the default rate is climbing through the roof (see: "Predatory for-profit colleges and universities: the escalating default rate for student loans," July 13, 2010), the predator colleges continue to enroll more and more students knowing they cannot and will never be able to pay their loans.
- What is being sold as education for "debt" are such phony degrees as Homeland Security degrees - cost $80,000 a year for a bachelors degree; or try $30,000 to get a "Surgical Technical" degree at Kaplan University that is itself fraudulent. Culinary and arts "education" is being peddled for more than $50,000! A whole swath of surveillance and criminal justice "degrees" are being auctioned off for as much, if not more ("Drive-by predatory colleges put students into debt purgatory and deficits into the stratosphere," April 11, 2010, Weil, Danny).
- Kaplan, the for-profit predatory college whose name keeps popping up when one looks at fraud, misrepresentation, larceny of Title IV funds, theft of student funds, recruitment practices that parallel the military and many other issues such as poor professors, pre-packaged curriculum and failing colleges, has tried to privatize part of the Community College System in California.
- Kaplan College in Pembroke Pines suspended enrollment following the federal investigation covered in the 2010 GAO report referenced above. They stopped enrolling new students after federal investigators uncovered incidents of high pressure and potentially fraudulent and misleading sales tactics.
- A second Kaplan campus in Riverside, California, did the same thing. They also put new admissions on hold pending the results of an internal investigation ("Kaplan College suspends admissions at Pembroke Pines campus following federal investigation, Scott Travis," Sun Sentinel, August 5, 2010).
- Students were enrolled in the CHI/Kaplan Surgical Technology Program year after year, but they were purposefully not being told by Kaplan and their personnel that, in all likelihood, externship sites, required for the SurgTech program would not be available. If verified from further investigations, the practices amount to concealment fraud, overt misrepresentation and possible theft of Title IV funds. CHI/Kaplan upper management, well aware of the lack of externship sites needed to permit students to complete their program, continued for years to recruit and enroll students in a program whose tuition costs approached nearly $24,000 a year. When the fraud was detected, the college then engaged in illegal practices designed to reduce the number of enrollees by forcing students out on technicalities. Hundreds of students were unable to finish their programs and had their personal lives and credit history ruined ("Whistleblower Exposes How Kaplan University Cheats Low-income Minority students and The Washington Post Benefits," April 18, 2010).
- Kaplan is hardly alone in its hyperbolic predation. Corinthian College and the notorious Phoenix University have paid millions in whistle blower fines under Qui tam suits brought against the colleges.
- The Apollo Group Inc., the company that owns the University of Phoenix, fraudulently misled investors in 2004 about student recruitment policies. The panel ordered the company to pay shareholders about $280 million (January 17, 2008, The New York Times, "Fraud by University Owner Is Found").
- Jurors said Apollo officials "knowingly and recklessly" made false statements in a news release, a filing with the Securities and Exchange Commission and four conference calls with market analysts. By doing so, jurors said, Apollo violated federal securities laws (ibid).
"The students who are flocking to these schools are mostly poor and working class and they rely heavily on student loans to cover tuition. According to a College Board analysis of Department of Education data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans - one and a half times the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest - in some cases as high as 20 percent" ["The subprime student loan racket," Washington Monthly, Stephen Burd].
The criminal activity is not simply constrained to for-profit universities and colleges, as they like to refer to themselves. In December of 2009, the owners of the Business Computer Training Institute, or BCTI in Oregon, agreed to pay $3.2 million to settle six lawsuits by former students who attended its two Oregon campuses.
The lawsuits accused BCTI of fraud and unfair business practices, saying it lured students with inflated job-placement claims, but failed to provide the education it promised. The school closed in March 2005 under regulatory pressure ("Settlement with ex-students in Oregon," The Oregonian, Brent Hunsberger).
Then, there is ITT Educational Services, which reported in 2009 that new student enrollment increased 27.2 percent to 27,738 in its third quarter. With private sector lending still in decline, the for-profit educator is increasingly funding growth through an internal loan program not much different than a payday loan center. As a result, growth metrics looked impressive for ITT at the quarter that ended September 30, 2009:
- Total revenue per student increased 4.5 percent to $4,852 per student, helped by a five percent hike in tuition fees implemented in March 2009. Looking to 2010, management expects to raise tuition another 4 to 5 percent.
- The third-quarter operating margin improved 437 basis points to 36.1 percent, or $122.7 million, helped by lower advertising rates and more effective lead conversion rates (into enrolled students). ("Lessons not learned at ITT Educational Services," November 8, 2009, David Phillips, BNET online.)
"With a 10 percent unemployment rate in this country, the for-profit education industry is a playground for those in need of dreams. Do not be mislead by ITT's numbers, as the trail of money starts and ends back at ITT itself. Federal loan programs are falling short, so the company is dipping into its own coffers to help students cover this widening tuition gap. Up to 65 percent of its students need private lending, and analysts estimate that $100 million to $120 million in loans and scholarship assistance will need to come from ITT's internal lending program." [ibid]
Student Victims as Prey
The for-profit predatory colleges, in their mad dash to suck up as much as they can in Title IV funds, Pell grants, and other government subsidies, thus enriching their investors at the expense of students, prey on and then wolf down the most disadvantaged students they can find.
The for-profit predatory colleges sign up as many "borrowers" as they can - even pounding on homeless shelters to recruit bodies, looking for drug addicts they can enroll from recovery programs and all of this with debilitating consequences for borrowers who miss payments and borrowers' families. They set up at welfare offices, hang out at laundromats in low-income neighborhoods, recruit at public housing units, and their "recruiters" patrol the streets of distressed neighborhoods in automobiles or on foot looking for vulnerable working class bodies they can register for government cash.
As I noted at Dailycensored.com back in July of this year:
"You see, such disadvantaged students are desirable for the for-profit colleges because they qualify for federal grants and loans, which are largely responsible for the prosperity of the predators, the more bodies the colleges can 'ranch' the more money they make. When the students default and go back to alcoholism, drugs abuse, lock-down programs, mental institutions, prisons or the streets, you the taxpayer pay the government 97 percent of the loan, for you are covering the bet the students will graduate and pay their loan obligations, a bet not even Las Vegas would touch" ("For-profit predatory colleges and universities prey on the homeless while hedge fund operators get busy shorting the sector's stock: the next big economic bubble").
Many of the student-victims see the ads these syndicates run perpetually on TV hawking the educational degrees and the consumer life they promise to deliver. They promise the student this degree or that degree will bring them out of poverty or help them gain some of the material wealth they see on TV and in ads throughout their young lives. ("Stimulus Wreckage," Matt Smith, September 30, 2009 www.sfweekly.com.) They advertise themselves as conveyor belts to successful jobs in the middle of the Second Great Depression, spending as much as 50 percent of their revenue on marketing alone.
Many of the schools exclusively prey on low-income people and many candidates find out information about proprietary schools from presentations given or brochures left at food stamp offices, welfare offices or at low income housing projects. Cars with large signs on the doors have also been known to drive through housing projects slowly, like ice cream trucks (United States Government Accountability Office, "Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid," August 2009).
The schools employ recruiters, who also attend staged or legitimate "job fairs," in an attempt to attract the unemployed, who they can then cannibalize at the fair itself. One young woman I recently talked to at the Phoenix University told me she was recruited this way. At a job fair, she was approached by an "academic counselor," who aggressively got her to the school's "financial aid counselor" the same day. These are drive-by schools, "disaster schools" without a doubt, and their tactics are ruthless, their owners are without conscience and their profits sheets are bulging.
The Public as Victims
According to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com:
"Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today - both federal and private - total some $829.785 billion.
"The growth in education debt outstanding is like cooking a lobster. The increase in total student debt occurs slowly but steadily, so by the time you notice that the water is boiling, you're already cooked. (August 9, 2010, Mary Pilon, "Student-Loan Debt Surpasses Credit Cards").
By Kantrowitz's estimations there is $605.6 billion in federal student loans outstanding and $167.8 billion in private student loans outstanding. His tabulations show that $300 billion in federal student loan debts have been incurred in the last four years; this, while Americans were asleep and the corporate media purposely concealed the story (ibid). The bad news: none of the debt is dischargeable in bankruptcy and, therefore, will be paid by the general taxpayer.
According to The Chronicle of Higher Education, "one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions." ("Government vastly undercounts defaults," Field, K., July 11, 2010.)
Corinthian Colleges, another large, publicly traded player in the predatory, subprime, education market, announced in July 2010 that more than half of the loans it makes to its students will go bad. No problem, the college still makes profits for its investors and CEO's. Like most of the predatory institutions, it gets its money from government Pell grants and Title IV funds ("The Chronicle of Higher Education, Why do you think they're called for-profit," July 30, 2010).
The Phoenix University (the Apollo Group) is saddled up this year alone to receive $1 billion dollars from Pell Grants, not to mention the other $4 billion it will get from Title IV funds (ibid).
This means that government taxpayers will be on the line to cough up the money already siphoned off by the for-profit predatory schools as defaults spiral out of control and bankruptcy eludes students as an option.
The Community and State Colleges as Victims
The community colleges of the state of California, reeling from debt, entered into a memorandum of understanding this year which would have allowed students to take courses at Kaplan University, the private, online school. When the manure began to ripen, and it was discovered that the "units" would not be transferable to UC or Cal State campuses, the deal was canceled. (Larry Gordon, "Community colleges cancel deal with online Kaplan University," Los Angeles Times, August 26, 2010)
The plan, basically contracting out education for profit, was intended in part to offer students at the state's 112 community colleges a way to take courses that might have been canceled or overcrowded because of state budget cuts. But some faculty, concerned about getting entangled with a proprietary school, especially one like the notorious disaster college Kaplan, revolted. Kaplan, in its efforts to commodify education, planned to charge students a whopping $646 for a three-credit class, compared with $78 at a community college. Why? This is part of their business plan and how they take Title IV money (90 percent of their money comes from Title IV government monies).
Walmart recently announced a deal with the for-profit American Public University System (hardly public, the stock is traded daily on the New York Stock Exchange and is the brainchild of Jim Etter ("The Chronicle of Higher Education, Why do you think they're called for-profit," July 30, 2010). The "university" is better known as the American Military University, which has developed into a publicly traded, for-profit behemoth that now sucks in veterans, either those in active duty or retuning from war. The university is also the home of Larry Forness, the "professor," who lectured students on the best means of using torture, such as injecting Muslims with pig blood ("Does the American Military University (AMU) teach torture to its students or has it taught torture in the past?" WikiLeaks, March 29, 2010). Now, with the veteran market cornered, the American Public University seeks to train nine-dollar-an-hour employees for Walmart under the auspices of higher education, using government funds and especially Title IV monies.
With the current economic devastation sweeping the nation like locusts, more and more students, through visible high-level marketing, are being seduced to attend for-profit colleges. The words to the song are always the same: you need an education; we offer the best-buy in online degrees; you can do the work at your home; times are tough; to get ahead, additional and high-paying work skills are needed to thwart off individual economic collapse; and on and on. The message is very clear; there is no systemic economic problem under the current economic regime that cannot be staunched with a good, for-profit education. Insipid individualism and the commodification of education itself are now joined in a fervent embrace. All of this creates the opening for the predatory, proprietary college system, while it leaves in its wake an economic devastation for public institutions and student lives.
November 19, 2009, California Community Colleges Chancellor Jack Scott (who forged the failed deal with Kaplan) delivered the keynote speech at the opening session of the Community Colleges League of California Annual Convention and Partnership Conference in Burlingame, California.
Chancellor Scott's speech, Living in Difficult Times, addressed the issue of the growing numbers of students crowding into community colleges and how, in these lean financial times, college leaders must find creative ways to do more with less funding. Focusing on the irony of the situation, Scott noted, "At the same time our funds have been reduced, our enrollments have surged."
This fall, statewide enrollment increased at California community colleges by more than 3 percent while the funding was cut by eight percent. Colleges reported, at the time of fall registration, 95 percent of course sections were completely filled, with many students on waiting lists and some turned away with no classes available.
As Peter Phillips from Project Censored reported late last year:
"Higher education has been cut in twenty-eight states in the 2009-10 school year and further, even more drastic cuts, are likely in the years ahead. California State University (CSU) system is planning to reduce enrollments by 40,000 students in the fall of 2010. The CSU Trustees have imposed steep tuition hikes and forced faculty and staff to take non-paid furlough days equal to 10 percent of salaries. Our current budget crisis in California and the rest of the country has been artificially created by cutting taxes on the wealthiest people and corporations. The corporate elites in the US, the top 1 percent, who own close to half the wealth, are the beneficiaries of massive tax cuts over the past few decades. While at the same time working people are paying more through increased sales and use taxes and higher public college tuition." ["The Higher Education Fiscal Crisis Protects the Wealthy," November 22, 2009.]
Countless numbers of Californians are flocking to the community colleges for job-retraining after losing their jobs in the economic downturn. Community colleges are also becoming increasingly popular because the California State University and University of California campuses are full and far too expensive; more veterans are utilizing the GI Bill benefits, and the economy is forcing many to look for affordable higher education options. (Paige Marlatt Dorr, director of communications
California Community Colleges)
When public social institutions like colleges and universities collapse and when veterans return with GI Bills and no public institutions to attend, this is all good news for the predatory colleges, their owners and shareholders. For, as public colleges turn away students in droves due to financial collapse, it means more and more students will flock to the for-profit college centers in hopes of receiving an education and this, of course, means that like vampires, the schools can get their hands on more public monies - the GI Bill funds, Pell Grants, Title IV funds - all this while public institutions starve.
Ah, the beauty of privatization, the free market. But it's hardly free as stated earlier, not with the large default rates in the billions that are shouldered by hard-working Americans who are forced to pay them. The only thing that is free is the public funds transferred to private coffers of these predatory institutions that see only an exchange value in education. The proprietary schools are now like privatized pike in a public lake.
Creating the Material Conditions for the Private Ownership of the Means of Educational Production: The Role of the Neoliberal State
Acting as a collection agency, the federal government collects taxes from ordinary citizens and then distributes the money to proprietary colleges through a middle man, usually Wells Fargo or Sallie Mae. A student must enroll and be accepted at one of the proprietary schools before they can receive Title IV funds in the form of grants, loans or campus-based aid through Sally Mae, Wells Fargo, or any other third party. The schools themselves must also be "approved" by the DOE in order to participate in receiving the Title IV funds. This means the schools must be licensed or otherwise legally authorized to provide higher education in the state they are located in; they must be accredited by an agency recognized for this purpose by the secretary of the US Department of Education and they must be deemed eligible and certified to participate in the federal student aid programs by the Department of US Education (United States Government Accountability Office, "Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid," August 2009).
This is what is referred to in government parlance as the "triad" - the threshold colleges must meet for government funding. It is the DOE, now under the tutelage of Duncan, that must oversee this entire process and ensure that only eligible students receive Title IV monies in accordance with the triad mandates. The DOE, FSA, manages and administers student financial aid assistance under the Higher Education Act passed in 1965, also known as Title IV. The programs include: William D. Ford Federal Direct Student Loan Program (Direct Loan Program), the Federal Family Education Loan Program (FFELP), the Federal Pell Grant Project (Pell Grant), the Campus Based Aid Program or the Federal supplemental Educational Opportunity Grant (FSEOG), Federal Work Study (FWS) and the Federal Perkins Loan Program (administered directly by the Financial Aid office at each school). In 2008 alone, Title IV funds provided more than $85 billion dollars in student aid of which roughly 16 percent went to the proprietary schools and colleges. That's a lions share by any estimates, especially if you look at the 64 percent default rate, which is and will eventually be paid by taxpayers.
Currently, there is what is called a "90/10 rule" which applies only to proprietary schools. What this means is that at least 10 percent of student tuition must come from means other than student-loan funds. And then there was the "50 percent rule," which required a proprietary school to offer no more than 50 percent of its courses online. These rules were enacted to address rampant fraud among proprietary schools in the 1970s and 1980s. However, in February of 2006, the 50/50 rule was repealed in a reconciliation act passed by Congress. The bill, SB1932 passed the house by a slim margin, 216 to 214, but it then went on to slide through the senate. Now, the schools can offer all their classes online and this means no need for brick and mortar. Most are now "ghost schools," or disaster colleges that reside in office buildings and hardly offer any campus life other than vending machines and computers.
As to the 90/10 rule, which simply mandated that ten cents of every dollar the proprietary school took in had to be from another source other than the federal government, it, too, has been drastically eroded if not vitiated. In July of 2008, long before the $787 billion stimulus, the federal government increased its guaranteed educational loan limits by $2,000 per student. Why? According to Business Week, they were worried that privately funded lending would dry up in the recession, but one of the shocking implications of this move directly benefited the proprietary colleges. Now, with the federal government increasing its guaranteed educational loan limits by $2,000 per student under the new Obama rules, these monies are "counted" as part of the 10 percent by the proprietary schools, creating an accounting mish mash - a paper shuffling accounting system with no transparency and where no one can actually really trace the percentages.
Borrowers must begin repayment after dropping below half-time enrollment, according to the rules of Title IV. Usually, the default rate can be seen after nine months, or 270 days, when the borrower, in this case the student, has not obtained cessation of the debt through myriad and complicated processes, or, in the case of some students referred to deferment or forbearance due to hardship or disability (United States Government Accountability Office, "Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid," August 2009).
The social policies of the neoliberal capitalist state are responsible for laying the groundwork for creating the material conditions for the private ownership of the means of educational production. This is no surprise. Take the current "stimulus" passed by the Obama administration.
According to an article in Business Week, a web site that covers the rapidly declining state of public education:
"Career-oriented schools such as the University of Phoenix, a unit of publicly traded Apollo Group (APOL), have been benefiting from lean times as adults scramble for credentials they hope will help them find work. The stimulus enacted last month will accelerate this trend by providing an additional $15 billion in Pell Grants for students over the next two years. Apollo, which received more than three-quarters of its $3.1 billion in revenue from federal student aid in the fiscal year that ended Aug. 31, is well positioned to take advantage of the stimulus. Its Phoenix unit already is the biggest recipient of government student aid. In its most recent quarter, which ended Nov. 30, Phoenix boosted ad spending by 24 percent, to $88 million. Its enrollment rose in the quarter by 18 percent, to 385,000 students, who study at campuses in 39 states as well as online." ["For-Profit Colleges: Scooping Up the Stimulus," March 12, 2009, by Ben Elgin and Jessica Silver Greenberg.].
In a letter dated November 19, 2008, to Henry Paulson, then secretary of the US Department of Treasury, the American Association of Collegiate Registrars and Admission Offices along with the American Association of State Colleges and Universities, the Consumers Union, The National Consumer Law Center, the Project on Student Debt, the National Association for the College Admission Counseling, US Public Interest Research and the United States Students Association all wrote to urge Paulson to reconsider his plan to unleash the Bush stimulus monies for private student loans. They implored Paulson in the letter, noting that:
"Most students and families do not use private student loans to pay for college, nor should they." [Letter to Paulson, November 19, 2008, by the American Association of Collegiate Registrars and Admission Offices along with the American Association of State Colleges and Universities, the Consumers Union, The National Consumer Law Center, the Project on Student Debt, the National Association for the College Admission Counseling, US Public Interest Research and the United States Students Association]
The correspondence to Paulson indicated that only 8 percent of students currently use standard bank loans to attend university. This changed now that the banks are flush with money and looking for profitable investment strategies and new investment "opportunities." What could be better than to offer subprime loans to desperate young people looking for an education and a way to maintain civilian life? Yet, the fact is private loans are risky and expensive and lack the protections, oversight and regulations of safer federal loans. Furthermore, providers of private student loans already receive special treatment in bankruptcy at the borrower's expense. But the students don't; their loans are nondischargeable in bankruptcy.
The letter to Paulson went even further, noting the signing groups, unlike federal loans, have no real protections for borrowers and co-signers. And there is no limit to how high the interest rate can climb. The letter notes that private student loans are like subprime mortgages where the lowest income borrower is saddled with the highest interest rates and the worst terms. Not only this, but the letter goes on to point out that in cases of unemployment, disability or periods of no income - even death, their families have few options for relief (ibid).
The loans are impossible to discharge in bankruptcy courts, unlike other forms of consumer debt such as credit cards. As the associations indicated in their letter to Paulson, someone who racks up thousands of dollars buying skis on a credit card can get relief through bankruptcy. Yet, in the case of, say, a teacher saddled with private loans from the proprietary schools who can't work due to disability - she has no way out. The use of bailout monies now put the lenders' investments, or usury, in a privileged category at the expense of students and consumers.
It is criminal that billions of taxpayer dollars are allowed to be spent enabling lenders to continue to make these high risk loans, which then become defaults picked up by taxpayers. But, unfortunately, this is precisely what is going on; for Paulson, of course, didn't listen to the various gate-keeping organizations intent on protecting the public interest, nor did he care; he was more focused on bailing out his friends, not public citizens who have to work for a living. He doled out federal monies despite fervent warnings to major banks, for private student loans, just as he bailed out AIG and Goldman Sachs. The Fed bailed out the lenders of these student loans by allowing them to use subprime student loan assets as collateral for accessing federal funds. Now, the proprietary schools have another venue for slopping up funds headed for debt - thanks again to the actions of the federal government. This is legal crime committed during broad daylight hours, but, of course, no mention of it was reported in the corporate press.
But the story begins long before the stimulus bailout and Obama even thought about entering government. The DOE under George W. Bush and Rod Paige used government deregulation in an effort to help create a system of debt peonage for students, while offering larger and very profitable business opportunities to their friends, the proprietary colleges. Today, we see the chickens have come home to roost as Wall Street continues to find ways to bilk the American people and the corporate media continues to hide the crime scene. Kaplan College, for example, is owned by The Washington Post, a blood bank providing more than 62 percent of the paper's revenue ("Kaplan University: Blood Bank for the Washington Post," July 27, 2010). You can hardly count on them to run a story on the private ownership of the means of educational production.
As Sam Dillon, reporter for The New York Times, reported as early as March 2006:
"The power of the for-profits has grown tremendously," said Representative Michael N. Castle, Republican of Delaware, a member of the House Education and Workforce Committee who has expressed concerns about continuing reports of fraud. "They have a full-blown lobbying effort and give lots of money to campaigns. In 10 years, the power of this interest group has spiked as much as any you'll find."
Sally L. Stroup, the assistant secretary of education who is the top regulator overseeing higher education, is a former lobbyist for the University of Phoenix, the nation's largest for-profit college, with some 300,000 students.
Two of the industry's closest allies in Congress are Representative John A. Boehner of Ohio, who just became House majority leader, and Representative Howard P. McKeon, Republican of California, who is replacing Mr. Boehner as chairman of the House education committee.
And the industry has hired well-connected lobbyists like A. Bradford Card, the brother of the White House chief of staff, Andrew H. Card Jr.
The elimination of the restriction on online education, included in a $39.5 billion budget-cutting package, is a case study in the new climate. Known as the 50 percent rule, the restriction was one of several enacted by Congress in 1992 after investigations showed that some for-profit trade schools were little more than diploma mills intended to harvest federal student loans.
Since then the industry has grown enormously, with enrollment at such colleges outpacing that at traditional ones. In 2003, the last year for which statistics were available, 703,000 of the 16.9 million students at all degree-granting institutions were attending for-profit colleges. (March 1, 2006, New York Times, "Online Colleges Receive a Boost From Congress," Sam Dillon.)
Regulating the Criminal Enterprise
With the deficit growing astronomically due to two illegal wars, the bloated defense budget, bailouts to Wall Street and the costs of subsidizing the for-profit predatory colleges and universities, there was little the neoliberal state could do in light of the criminal activities of the private educational complex, but attempt to regulate the industry.
The new proposed rules by the DOE, due to be passed sometime in November 2010, would supposedly grant the DOE stronger authority to stop these for-profit "colleges" and schools from making false or misleading statements about financial charges. They do this regularly as the GAO report reveals and as the whole sordid history of the industry has shown. They also lie about the expected employability of their graduates, many claiming they can place students in gainful employment when, in fact, they cannot. The DOE also wants the predatory for-profit colleges, universities and schools to be barred from paying recruiters based on how many students they brought in. That's the practice now, and you can read about the whole recruitment corralling of students in an article I wrote back in 2009 entitled: "Private Predatory Colleges: How the neoliberal Alchemists Turn Debt into Profit and Citizens into Fools".
However, the most important and currently onerous "regulation" proposed for the for-profit educational industry would cut off federal aid to for-profit programs that repeatedly saddle students with debt that is defined as unaffordable under a new formula that takes earnings into account. This is the "gainful employment" rule that will drive a stake through the heart of many for-profit colleges and universities if it is passed in November of this year. The rule is all about assuring that the for-profits are offering an educational service that will prepare graduates for gainful employment. The problem - there is no employment.
It has long been believed by politicians and corporations that education is little more than a training ground for capitalist labor to eventually be exploited. Simmering education down to gainful employment is not a novel idea when one is laboring under these assumptions. Rather than see the entire enterprise of for-profit colleges as criminal, which it is, the government now seeks to rein in some of the "abuses" they see in the system they helped create. Regulating the material conditions for private ownership of the means of educational production can only come from starving the insidious institutions that fail to comply by withholding government subsidies. While certainly a start, the whole notion is problematic, for it leaves the predatory industry intact when anyone who has studied the crime scene can see that this criminal enterprise cannot be regulated; it must stopped. However, even this small bit of "rhetorical" regulatory posture has the billion dollar, for-profit industry on the offensive.
Corporations Fight the Neoliberal State Regulations With Faux, AstroTurf Groups
The for-profit, cybernetic educational industry has come forth on record, calling the illegal practices uncovered by the GAO a case of "bad apples." Kaplan officials said they found the disclosures "sickening." In a joint statement from Donald E. Graham, chairman and chief executive of The Washington Post Co., and Andrew S. Rosen, chairman and chief executive of Kaplan Inc.:
"They violate in every way the principles on which Kaplan is run. We will do everything in our power to eliminate such conduct from Kaplan's education institutions."
Similar to the movie "Casablanca," Graham, like the actor Claude Rains, seems surprised "gambling" is going on at Rick's Place. Yet, while the government is getting ready to step in and put into place policies that will allow the industry to continue its ownership of the educational means of production, albeit regulated, the for-profits are now busy building a faux revolution, akin to Dick Army's Freedom Works; or the fake coalitions put to together by the Koch brothers to fight any regulation of the coal industry; or the "Parent Revolution" out of Los Angeles controlled by Green Dot, a charter school CMO, which recruits parents to work for charter school legislation by disassembling public education. What these groups have in common is that they are heavily supported by legions of right-wing cash.
The New York Times of September 7, 2010, noted that:
"For-profit colleges have increased their lobbying against proposed Education Department rules to cut off federal financial aid to programs whose students take on too much debt for training that provides little likelihood of leading to a well-paying job" [For-profit colleges step up lobbying against new rules, New York Times, September 7, 2010.]
In addition to making personal visits to Capitol Hill, executives for many of the colleges have recently provided their employees with "personalized," standardized, form letters urging them to send them to Washington to fight the new regulations. They have also started a campaign to get their students to speak out against the new "gainful employment" regulation. Sound like the phony health care groups set out to battle Obama's health care reform? You betcha!
So far, The New York Times has found that the DOE has received about 45,000 letters on the proposed "gainful employment" rule within the last month.
John Sperling, the born-again Christian fundamentalist and founder of the nation's largest for-profit college, the University of Phoenix, emailed every member of Congress, seeking help opposing the regulations, and attached a sample letter to be sent to Education Secretary Duncan, asking him to withdraw them. He has conveniently married his new-found, fundamentalist religion with market fundamentalism.
Graham, the chairman and chief executive of The Washington Post Company, which receives 62 percent of its revenue from its various Kaplan educational businesses, visited Sen. Tom Harkin, Democrat of Iowa, whose Health, Education, Labor and Pensions Committee is holding hearings on the for-profit education industry. His goal: stop the regulations.
But the heavy, billion dollar players have done more than just urge employees and students to come out for their for-profit cause. The Education Management Corporation, the second-largest, for-profit company in the industry, hired DCI Group, a public relations firm, to contact its employees for information that could be used to create a "personalized" letter, which would then be delivered back to the employee for signature, along with a stamped, addressed envelope aimed straight at the DOE. ("Astroturf U: Goldman's For-Profit College Battles Obama Crackdown," Mother Jones, Andy Kroll, September 2, 2010.)
The AstroTurf group also drafted and is offering pre-crafted letters that students can use to send to their Congressmen. Mother Jones reported that:
"Some of the letters show little familiarity with the proposed regulations. For example, an Education Department official said, students at a particular school sent in dozens of hand-written letters asking for continued aid to for-profit colleges, but never mentioning the regulations. He said he called a letter-writer to ask whether the letter was intended as a comment on the regulations, and was told, 'This is what the school asked us to write.' He would not identify the school." [ibid]
This is not unusual and echoes the practices of many of these predatory colleges who have their professors write student papers so students can remain enrolled and thus beneficiaries of the federal dollars that end up in the coffers of the blood banks.
EDMC also has a web site, the Higher Education Action Center, guiding students or employees to oppose the regulations, offering their own "pre-crafted" letters. Argosy, a unit of EDMC, said last month in an email soliciting more comments that more than 2,000 people had used the site in the previous week.
The Real Problem Is the Private Ownership of the Means of Educational Production
Beginning in the Bush years, or actually before, the neoliberal state worked diligently to provide the material conditions allowing for the enormous growth of education for profit. In doing so, it has now created its own Frankenstein of debt and default that seeks refuge in the pockets of ordinary taxpayers. The for-profit industry, armed with billions of dollars and working off the disaster economics that has left the public sector unable to keep libraries open, let alone provide a decent opportunity for students to gain universal access to education, is now enabled with lobbyists and private firms to fight Washington tooth and nail against their proposed regulations. But this is hardly the point. For the regulations promise to leave intact a criminal enterprise that is not just a collection of bad apples, but is a rotten barrel of despair, financial ruin for students and moral outrage, not to mention the source of costs that will be thrown on the backs of ordinary Americans as students find there is no "gainful" employment under the economic policies of market fundamentalism and Wall Street crimes, and the defaults quicken. What all this means is that taxpayers may be on the hook for close to one trillion dollars or more.
I spoke to a young man of about 30 years old in my last sojourn at the Phoenix Institute in Oakland. When I asked him how his classes were going, he told me that they were going well, but he was living in his car with no job. However, he indicated, a bit animated, with the federal monies for school he received not only does he have the use of the computers and a warm place to go, but he can clean up in the office bathroom. This is privatized homelessness under Title IV that is parading as privatized education.
The free-market policies ruthlessly pursued through the calamitous corporatization over the last 30 or more years have imposed crushing and profound changes onto the lives of children and working adults. On National Public Radio, November 23, 2009, a student at one of these proprietary colleges was interviewed. She reported that she now pays $300 dollars per month to service her federal loans and that her parents had to take second jobs just to help her pay for her proprietary education. Currently, she cannot find a job, so her answer: she will borrow more money now to go on to graduate school, for in this way, she will not default on her loans, meaning wage garnishment, withheld social security and an inability to rent or buy a home. Debt peonage and a lack of public and civic life are forcing her and her family into the brutal margins of society (NPR, "All things considered," November 23, 2009).
Each and every day I receive letters and emails from students asking me what they can do to stop the predation. These are students whose lives are now ruined; they cannot get credit, they cannot involve themselves in any financial life and they cannot rent apartments or go to school.
Whistleblowers, known as Former Disgruntled Employees (FDE's) have written me telling me of the ghastly policies they have witnessed and/or participated in, but they dare not use their names or they will find that the power and authority of these for-profit dungeons of despair will literally blackball them from the industry overnight. I have spoken with countless lawyers who have told me they have no resources to fight the billion dollar industry attorneys.
There is no "college experience" at these proprietary schools; there are not even libraries at most of these schools or facilities where students can meet. At many of the proprietary schools that offer a "campus," one finds the colleges really languish in grimy storefronts in large office buildings along side other businesses, like insurance companies, mortgage outfits and financial institutions that share the office building rent. Usually the administration office of the "campus" is comprised of simply a desk and rows of computers; the food services are vending machines dominated by Pepsi and Coca Cola and the class rooms are rented to corporations when not in use by the proprietary school. At the Phoenix Institute's "campus" in Pasadena, California, the college sits in a large office building that shares tenancy with the Rand Corporation, harbored on the upper level floor. The college also makes $25,000 - $30,000 per month just renting out the classrooms when they are not in use (interview with former Phoenix employee).
As I chronicled back in 2009, for-profit predatory colleges for years marketed to the disenfranchised, the down and out, the sub prime students and, thus, they make up the "fringe economy" of other such predators like cash loans, payday loans, title loans for cars, check-cashing scams and the like. These "operations of higher predation" have been caught recruiting students at housing projects, welfare office, unemployment offices, laundermats in poverty stricken areas and, now, yes, the true down and out - the homeless and often drug addicted segments of our population, mostly minority. They actually enter homeless shelters where they rabidly prey and feed on the underclass of America ("For-profit predatory colleges and universities prey on the homeless while hedge fund operators get busy shorting the sector's stock: the next big economic bubble," July 19, 2010, dailycensored.com).
As any crime fighter knows, you cannot regulate larceny. What needs to be done is to build a sustainable economy that can provide a quality, public school experience for our nation's children. However, as long as education is boiled down to training for a capitalist society in ruins, this can hardly expect to take place. As the public sector diminishes due to the disaster capitalism of the last 30 years, we can only hope to see a few changes in the form of regulations. Until then, look for this storm to pass, as once regulations are passed, paying to get around them becomes part of the business plan as it always has been. In the interim, look for the for-profit educational scam that was and has been allowed to exist thanks to the partnership between business and the neoliberal state to be the next big financial bubble just waiting to burst.
Below is a long article but please glance through it. I am posting articles from the 2000s because it is then we know Reagan/Clinton started dismantling oversight and accountability in the name of smaller government. Republican voters were sold on small government because they were told social programs would be axed-----but what global corporate pols had in mind was small government as a way to unleash unlimited fraud and corruption====just as exists overseas in developing worlds. These US corporations steal much of overseas development money and now they are doing it here in America thanks to neo-liberals and neo-cons suspending Rule of Law.
The actual amounts of defense industry fraud is in the trillions of dollars and the Wikileak documents exposing the defense industry expenditures that mainstream journalists will not investigate but international investigative journalists are show the absolute looting of our US Treasury by defense industry contractors just as happened in health care, the financial industry, the for-profit education industry, and the housing industry. At each step your politicians knew it was happening and could have shouted loudly and strongly but you do not hear a word beyond a few soundbites at the time of an exposure. MARYLAND IS KING OF THE FLEECING OF TAXPAYER MONEY FROM ALL LEVELS OF GOVERNMENT and this is why the poor are being made third world in poverty and the working and middle-class are seeing their taxes climb and fees and fines galore.
Obama is continuing to make it 'easier for contractors' and Trans Pacific Trade Pact simply tries to make all of this ignoring of US law legitimate by re-writing the Constitution without all that bothersome Citizens as Legislators, Equal Protection, and Rule of Law stuff
"According to some estimates we cannot track $2.3 trillion in transactions," Rumsfeld admitted. $2.3 trillion — that's $8,000 for every man, woman and child in America. To understand how the Pentagon can lose track of trillions, consider the case of one military accountant who tried to find out what happened to a mere $300 million.
'The Clinton-Gore Administration
From its beginning, the Clinton-Gore Administration has pushed for changes to make things easier for contractors through its Acquisition Reform program in the Defense Department. The initiative was the culmination of a long process of working closer with industry and its campaign contributors undertaken by the Democratic Party when it began targeting corporate campaign contributions more aggressively in the 1980s.
The defense industry succeeded beyond its wildest dreams in winning endorsement of its proposals after the 1992 presidential election. Their plans proved to be in the right place at the right time when Vice President Gore was looking for new changes to make through his Reinventing Government initiative. Industry wishes were compiled by a Congressionally-created committee known informally as the "Section 800 panel," which was industry-dominated. 19 The panel's report was completed soon after the Clinton-Gore Administration took office. Its recommendations helped shape the Reinventing Government plan, which was put together under a tight deadline and needed new proposals quickly'.
Defense Waste & Fraud Camouflaged As Reinventing Government
September 1, 1999 Table Of Contents
The Problem: Pentagon Waste Returns
Why We Need Oversight - 618% Overpricing
Acquisition Reform 101
A Detailed Study: Getting Good Prices Without Acquisition Reform
Acquisition Reform's Claims: Confusing What the Government Buys With How It Buys
The Cause: Why and How Is This Happening?
Today's "Acquisition Reform:" Rolling Back Yesterday's Reforms
Important Procurement Reforms of the 1980s and Their Current Status
Counterattack in the 1990s
The Clinton-Gore Administration
Acquisition Reform - Not Really Adopting the Free Market
Monkeying with Oversight: Hear No Evil, See No Evil, Speak No Evil
Penny Wise, Pound Foolish
Acquisition Reform: "Streamlining" Dollars from Our Pockets
Paying for Luxury Hotels Again
Accepting Data That Need Not Be "Current, Accurate, and Complete"
The $435 Hammer That Won't Go Away
The Solution: How to Stop De-Inventing the Wheel
Overpriced spare parts horror stories from the 1980s taught us how to prevent fraud, and led to useful reforms. By the 1990s, however, defense industry interests dovetailed with Vice President Gore's Reinventing Government campaign, and new policies bypassed some of the earlier reforms.
In the name of adopting "commercial" practices, the Administration's defense Acquisition Reform effort has gone beyond cutting red tape into throwing out important protections against contractor abuse that are needed even in a more commercial environment. For example, a new greatly expanded definition for a "commercial" product has exempted many more purchases from normal oversight.
The problem has predictably begun to appear in the form of more overpriced parts stories:
- AlliedSignal corporation was found to have overcharged the government for spare parts by as much as 618%. The government overpaid on the overall contract with AlliedSignal by 54.5%.
- Prices were inflated by more than 1,000 percent on a variety of spare parts. For example, the Boeing price for a commercially-available $24.72 "spoiler actuator sleeve" was $403.39 - a markup of 1,532 percent. Another contractor charged $714 for an electric bell worth $46.68.
- The AlliedSignal cases provide examples of the government paying more for spare parts under the new "commercial" rules than it paid under the earlier reforms. As the Defense Department's Office of the Inspector General has noted, the loose definition of commercial items "qualifies most items that DoD procures as commercial items" [Emphasis added].
- A Defense Department Inspector General's report indicates how adopting commercial practices has come to mean subservience to contractors and blind acceptance of their claimed costs and prices: "contracting officers shall require information ... when necessary to determine price reasonableness for commercial items, but there is a strong DoD [Department of Defense] preference not to use that mechanism and the Government has not asserted its right to have the data." [Emphasis added.]
- Despite highly favorable dollar returns on taxpayer investment in oversight agencies, many of them have been gutted by personnel cuts. For example, the Defense Contract Audit Agency saves almost $10 for each dollar invested, but staff positions have been cut by 19% from Fiscal Year (FY) 1993 to FY 1997. As of 1998 the Administration scheduled it to suffer a total loss of more than 3,000 staffers - a 44% cut - over the period FY 1990 to FY 2002.
- The Administration has pushed defense corporate mergers, at a time when Acquisition Reform has failed to create adequate competition, a key requirement for the government to benefit from commercial markets. As a Department of Defense Inspector General noted, "If anything, the risks may be greater today because there is such market dominance by a few very large suppliers. In this environment, getting cost information and maintaining audit rights is a prudent business practice. Failure to do so will be very costly for the Department and ultimately the taxpayer." [Emphasis added.]
- Restore meaning to the definition of "commercial."
2) Restore the definition of commercial to mean substantial sales in a large free market.
3) Restore the definition of "competitive bidding" to be at least two bidders.
- Clarify that the government can and should still negotiate actively for some commercial items.
- Restore the use of cost or pricing data where prices are not set by a true free market.
- Preserve funding for the auditors, investigators, and independent rule-setting Boards like the Cost Accounting Standards Board.
- Defend the False Claims Act against industry assaults.
- Improve price-based contracting by increasing competition and reversing the trend of mergers leading to fewer competing contractors.
Introduction In the 1980s, as military spending boomed, numerous stories of waste in weapon buying surfaced in the media. The Project on Military Procurement, as the Project On Government Oversight was then known, along with others, brought to light $7,600 coffee makers, $435 hammers, and $640 toilet seats billed by unscrupulous defense contractors. The cases were disturbing because they implied that if such prices were being paid for simple items whose prices citizens understood, the total overcharging for complex weapons as a whole was enormous.
As a result of these revelations, measures were taken to tighten up oversight of defense contractors. Then, in the 1990s, the defense industry counterattacked, arguing that these reforms had gone too far. By 1994, with a Congress hostile to government regulation, and an Administration adopting a particularly accommodating relationship with business, the rhetoric of acquisition "reform" and "reinventing government" was used to justify moving beyond cutting red tape into bypassing key earlier reforms. For example, a new greatly expanded definition for a "commercial" product has exempted many purchases from normal oversight.
The results of these changes have already begun to show, with cases of gross overcharging for spare parts surfacing once again. The cause is an "Acquisition Reform" effort conducted by the Department of Defense (DOD) and supported by some in Congress. Acquisition Reform unabashedly seeks to reduce oversight of contractors and replace it with "trust," and has dovetailed with Vice President Gore's "Reinventing Government" campaign. The problem is that by going so far in reducing oversight, the reforms have thrown the baby out with the bathwater, resulting in cases of 618% overpricing again.
We already know how to protect against defense contractor abuses. We have been through many previous rounds of hyped reform initiatives that blew a lot of hot air but did not do much. But pushing the new "Acquisition Reform" too far and bypassing proven checks and balances now could actually make the situation worse - it is leading to de-inventing the wheel, not re-inventing it.
This report first looks at recent cases of defense contractor overcharging. It then examines the elements of Acquisition Reform that have caused the problem in more detail. The report concludes with suggestions for remedies.
The Problem: Pentagon Waste Returns Why We Need Oversight - 618% Overpricing Evidence of the results of loosening oversight is beginning to surface. A Department of Defense January 1999 report reveals that defense money is again being wasted on spare parts, as it was in the 1980s. In the report by the DOD Inspector General (IG), AlliedSignal corporation was found to have overcharged the government for spare parts by as much as 618%. The government overpaid on the overall contract with AlliedSignal by 54.5%. The irony is that these parts were bought under the new, much-touted "commercial" price system promoted by the Administration and Congress. According to the January 1999 investigation by the Inspector General: 1
The government "paid Allied prices that were higher than fair and reasonable in FYs [Fiscal Years] 1996 and 1997 when compared to the noncommercial prices paid to Allied in previous years." The parts included items such as gearshafts, wheels, nuts, bearings, seals, filters, and valves.
The Defense Department "paid a 54.5 percent premium for commercial parts from Allied" - in other words, were overcharged by more than 50%.
For parts that AlliedSignal did not even make itself, but merely bought from original manufacturers or dealers and then sold to the government, some items were variously marked up by as much as 294%, 325%, and 618%.
The Defense Department paid an even higher average markup in Fiscal Year (FY) 1997 (60.1%) than it did in FY 1996 (45.8%). It appears that in this case an Acquisition Reform "learning curve" is not being realized.
Defenders of the acquisition system argue that the government paid higher prices because the prices included more stocking services - but the Defense Department failed to use the services.
The Defense Department report blacks out the names of specific spare parts that were grossly overpriced. (See p.12 of Appendix A) Although contractors routinely claim such information is "proprietary," the real effect is that the public cannot easily find out how much they are overpaying for items they might recognize.
The Inspector General report on AlliedSignal followed 1998 IG reports of overcharging under "commercial" contracts with Boeing and Sundstrand corporations. The earlier reports (see "Acquisition Deform: A Study in Hasty Deregulation," Project On Government Oversight Alert, October 1997) found that:
Prices were inflated by more than 1,000 percent on a variety of spare parts. For example, the Boeing price for a commercially-available $24.72 "spoiler actuator sleeve" was $403.39 - a markup of 1,532 percent. 2
Sundstrand billed the government $6.1 million for parts that were worth only $1.6 million. 3
Boeing charged $5 million for parts that were worth $3.2 million in the competitive market. 4
A contractor charged $76 for 57¢ screws. 5
Another contractor charged $714 for an electric bell worth $46.68. 6
The Inspector General found that higher prices were paid for "commercial" items than had been paid earlier because: 7
- although Acquisition Reform allowed the Sundstrand items to be purchased under loose "commercial" item rules, in fact "there was no competitive commercial market to ensure the reasonableness of the prices";
- Sundstrand "refused to provide DLA [Defense Logistics Agency] contracting officers with 'uncertified' cost or pricing data for commercial catalog items";
- items were defined as commercial as long as they were merely "offered for sale, lease, or license to the general public" (emphasis added); and
- in the Boeing case, "contracting officers accepted Boeing commercial catalog prices as fair and reasonable without adequate support for price reasonableness, even when DoD was the 'primary' customer procuring significantly larger quantities than other commercial customers and there was no competitive commercial market to ensure the price integrity. The contracting officers made no attempt to exert the leverage that a major customer ought to be able to exert to negotiate significant discounts, as is common commercial practice." 8
"This opens up a major loophole for sole-source vendors to charge prices that cannot readily be evaluated for reasonableness. This concern will continue to grow as more companies merge and the aerospace industry becomes more of a sole-source environment." 9
Similarly, items under the loose definition can be merely "of a type" sold to the public, rather than a product that actually is sold to the public.
Acquisition Reform 101 The widely-promoted "Acquisition Reform" initiative emphasizes buying more products for the government on a "commercial" basis. "Commercial item" purchases bypass many of the protections and oversight put in place to prevent the infamous overcharging by defense contractors that occurred during the defense spending increases of the 1980s. The 1980s reforms included tougher Truth in Negotiations Act enforcement, re-establishment of the Cost Accounting Standards Board, strengthening of the False Claims Act, and passage of the Competition in Contracting Act.
The report on AlliedSignal provides examples of the government paying more for spare parts under the new "commercial" rules than it paid under the old rules. This is the opposite of what Acquisition Reform is intended to achieve. According to the Inspector General, the government "paid higher prices for commercial spare parts on the Allied corporate contract when compared to previous noncommercial prices for the same items."10
Astoundingly, government officials have been sent to training courses on commercial item acquisition run by the defense industry and taught by executives from AlliedSignal and Sundstrand! (See Appendix B)
Hinting that Acquisition Reform may have gone too far, the Inspector General report noted that if the government could not make commercial buying work as intended in the contract with AlliedSignal, it "will need to revert back to the previous buying practice of negotiating better prices for the spare parts ...."11
A Detailed Study: Getting Good Prices Without Acquisition Reform The government offices designing Acquisition Reforms have done precious little analysis of the actual effect of Acquisition Reform so far. Fortunately, a military officer undertaking an academic study has completed one of the few in-depth analyses to date comparing prices paid by commercial firms and by the government.
This study by Major Joseph Besselman examined a large number of DOD electronic, engine, and software commodity purchases. (See Appendix C) In contrast to the conventional wisdom that "commercial" prices are lower than what the government has obtained in the past, the report found that when the government is allowed to negotiate prices, and when the government has access to the manufacturer's cost data, it performs better than the commercial sector - obtaining even lower prices than commercial firms making similar purchases:
"Overall, weighted price difference analysis reveals the DoD outperformed the average commercial sector organization using commercial wholesale prices by 41.5 percent." 12
This key finding even held up when the government's costs of employing extra oversight and contracting people to gather cost data and negotiate prices is included:
"This research's case studies provide evidence that cost and pricing data enhances the DoD's buying position in high dollar value procurements, even when the costs of collecting that data are considered."13
The study sums up with guidance for how Acquisition Reform can avoid oversimplifying the real world in its enthusiasm for reducing oversight:
"The DoD's leadership needs to more realistically evaluate its push towards 'one size shoe fits all' public policy decisions as it tries to commercialize its operation to a greater degree. This research suggests that buying commercial items off commercial price lists will cost the taxpayer more money. Uniformly eliminating in-plant oversight personnel that collect cost and pricing data will adversely affect the DoD's purchasing power. Cost and pricing data is a valuable commercial sector tool the DoD buyer should exploit under the appropriate circumstances." 14
Government procurement practices are not all bad, and can successfully use commercial practices without necessarily abandoning other protections that have proven effective in preventing overpricing.
Acquisition Reform's Claims: Confusing What the Government Buys With How It Buys Reduced to its substance, Acquisition Reform is about changing the way the government buys goods and services, not changing what the Government buys. Acquisition Reform proponents argue that by changing how the Government buys, a lot of money can be saved. Yet, they produce little evidence to bolster their arguments - such as examples of prices lowered because of savings. In some of the instances where they do present "evidence," it is apparent that they have actually changed "what" they were buying instead of "how." In other words, it is an apples-and-oranges comparison.
For example, Steven Kelman, the Administration's former chief "point person" on acquisition reform as head of the Office of Federal Procurement Policy from 1993-97, tells stories of how the Government saved large sums by allegedly changing the way it purchased shipboard telephones. According to Kelman, under Acquisition Reform the Navy was able to reduce shipboard telephone costs from $400 to $20 per unit. When asked how the Navy did this, Kelman answered that they went from using custom telephone specifications (or "mil specs") to buying regular commercial phones. While this might be laudable if the phones really did not need to have special capabilities for a naval combat environment, it really has nothing to do with the "how" part of the buying process. Instead, what was changed was the "what" part - it was decided that commercial phones were capable of the job. It is like saying you reduced the price of a car from $40,000 to $20,000, but omitting the fact that you stopped buying Cadillacs and started buying Chevrolets.
Another instance comes from one of the most famous Acquisition Reform stories - the image of Vice President Gore smashing an allegedly overpriced ashtray on the David Letterman Show. The story was that by purchasing commercial ashtrays instead of using lengthy and almost unintelligible custom government specifications for these ashtrays, a lot of money could be saved. The Vice President pointed out to the television audience that ashtrays were only one example of Government custom specifications run amuck. But, what he failed to explain was that this was not a "how" to buy issue, it was a "what" to buy issue. Of course, it probably made no sense to continue purchasing custom made ashtrays (or chocolate chip cookies or t-shirts). But, it wasn't a procurement or contracting procedure change that made for all of the allegedly big cost savings. It was a decision to buy cheaper, standardized ashtrays, instead of the custom models.
According to Acquisition Reformers, the Government can save a lot of money if it changes the "how" part of the buying process. But, most of what the contractors (and their supporters in Congress and the Administration) want changed are exactly the parts of the "how" to buy process that ensure fair and reasonable contract pricing and value to taxpayers.
The Cause: Why and How Is This Happening? Today's "Acquisition Reform:" Rolling Back Yesterday's Reforms In the 1990s, the defense industry has taken up the offensive against what it saw as overbearing procurement reforms of the 1980s. Most of these reforms, however, were useful protections for the taxpayer against contractors that had already taken advantage of us in the 1980s. The reforms, including 35 procurement reform initiatives ordered by the Secretary of Defense in 1983, have had positive results: a DOD Inspector General report notes that "Implementation of the Competition in Contracting Act, enacted in 1984, and the 35 spare parts procurement initiatives resulted in dramatic increases in reported competitive procurements and savings from 1985 to 1988."15
Former DOD Inspector General Eleanor Hill noted the dangers of rolling back these reforms:
"We remain concerned about suggestions to limit or repeal controls that have been proven effective over time, such as the False Claims Act, the Truth in Negotiations Act, the Cost Accounting Standards, the statute that prohibits contractors from charging unallowable costs, and the Defense Contract Audit Agency. We believe that these controls have been critical to maintaining the Government's ability to adequately protect its interests in the acquisition area."16
Some of the key reforms targeted by the defense industry and their current status are described in the table.
Important Procurement Reforms of the 1980s and Their Current Status Reform Purpose Status Today False Claims Act Strengthened 1986: The False Claims Act was originally Civil War-era legislation intended to halt war profiteering. Amendments to the Act in 1986 increased the penalties for fraud and encouraged whistleblowers to come forward when they were aware of defrauding of the government. The law has been under heavy assault by the defense industry. Industry claims that "innocent disagreements" are being prosecuted as fraud. The Defense Department has flirted with pushing changes to the Act, and has worked with industry to gather information to support weakening the law. DOD and the industry have repeated the theme that companies are deterred from doing business with the government for fear of alleged excessive vulnerability to fraud lawsuits. The Department of Justice, however, has strongly rebutted claims that the False Claims Act is burdensome and needs amending. Justice noted in a response to the claims of the Defense Policy Advisory Committee on Trade (DPACT), an industry group that, for example, "DPACT provides no support beyond mere assertion for the proposition that False Claims Act liability has any substantial effect on defense industry profits or on the industry's relationship with DOD. Moreover, analysis of the data available to us shows no such effect 17
So far, strong resistance from Congressional supporters of the False Claims Act such as Senator Charles Grassley (R-IA) and from the Department of Justice - bolstered by the fact that billions of dollars have been recovered for the taxpayers - have kept efforts to weaken the law at bay, but industry attempts to overturn the strengthened law continue.
Truth in Negotiations Emphasis 1980s: The Truth in Negotiations Act (TINA) requires that contractor data submitted to the government to be current, accurate, and complete. Enforcement and emphasis on TINA were boosted in the 1980s. Congress kept a close eye on the issue, and the General Accounting Office (GAO) did many reports that emphasized the importance of TINA. The Federal Acquisition Streamlining Act and the Federal Acquisition Reform Act (Clinger-Cohen Act) exempted so-called commercial item contracts from TINA. Using false and misleading logic, Acquisition Reform proponents have tried to link application of TINA and application of Cost Accounting Standards, suggesting that anywhere TINA does not apply, neither should the Cost Accounting Standards. Procurement Integrity Statute Created
1988: Amendments to the Office of Federal Procurement Policy (OFPP) Act attempted to prevent the types of corruption that were exposed by Operation Ill Wind. The scandal revealed that contracting officials were selling source selection information - the strengths and weaknesses of competing bids based on the proposals under review - so that their associates could strengthen their own proposals when they went into negotiations. The Amendments pulled together a variety of laws that prohibited revealing information to contractors and required that officials and contractor employees sign statements saying they were aware of the integrity laws.
In response to industry criticism that the legislation merely duplicated other laws, and was unnecessarily burdensome, the paperwork was simplified in the 1990s.
Cost Accounting Standards Board Reestablished
1988: The OFPP Act Amendments also re-established the Cost Accounting Standards (CAS) Board. The CAS Board sets accounting rules designed to achieve uniformity and consistency in the accounting practices contractors must follow when pricing contracts or submitting bills to the government. The original CAS Board was terminated in 1980 when Congress failed to continue its funding (after heavy defense industry lobbying to abolish the Board).
After a steady drumbeat of industry pressure, by 1999 the Board has been "demoted" as an organization within the Office of Management and Budget, Board Members and staff are largely being bypassed, a government-industry review panel has proposed dramatically raising the dollar thresholds for applying the Standards among other limitations on the Board's rules, and DOD-inspired legislation has been submitted to allow exemptions from the rules for any contract or any contractor.
Competition in Contracting Act Passed
1984: Several factors were behind the important Competition in Contracting Act. First, an influential GAO report concluded that only a small share of contracts were being competed, and noted that competed contracts brought down prices sharply. Also, scandals involving spare parts overcharging were caused in part by markups as prime contractors supplied parts to the government that were actually produced by subcontractors. Finally, the small business community lobbied to be able to sell more to the government directly.
The Act opened up competition by requiring contracts to be "fully and openly competed." The Defense Department's ability to choose whomever it wanted for a contract was narrowed.
The Act has been weakened. Technically, full and open competition is still in place, but now only to the extent that it is "consistent with efficiency." In many cases, the competition requirement is now just for a "reasonable opportunity to be considered" for a contract.
The rules have been bypassed in part by expanding another form of contracts, those in which specific deliverable products are not specified exactly in the contract, but the contractor is available to perform services or produce products if called upon. Major weapon contracts are not usually of this form. The new form of contracts - which are more like "supplier agreements" or "licenses to sell to the government" - were exempted by the Federal Acquisition Streamlining Act of 1994, so that requirements for full competition are much less robust.
Penalties Increased for Disallowed Costs
1985: The 1985 DOD Authorization Act increased the penalties for costs submitted for reimbursement by contractors that the government determines are not valid claims.
The statutes are currently still on the books, but are under industry criticism, since the industry feels the statute excessively "criminalizes" what they see as "civil" violations.
Counterattack in the 1990s Industry has lobbied hard to reverse or bypass many of the reforms of the 1980s. In the climate of cutting back government of the 1990s, both Congress and the Administration have pushed for loosening of oversight over defense contractors.
Part of the rationale for the reforms developed out of the overpriced spare parts scandals of the 1980s. The scandals were often the result of line items in "cost-plus" contracts - the type of contracts in which the government pays all of a contractor's permitted costs in executing a contract, plus an amount of profit on top. (Often the profit was set as a percentage of the total costs, creating an even stronger incentive to the contractor to push the direct costs as high as possible.)
The bad name that these cost-based contracts gave to defense procurement helped lead to official enthusiasm for price-based contracts - contracts based on a fixed price, agreed beforehand. The commercial world usually operates with price-based contracts. For example, a person contracting with a builder to construct a house would have to be pretty crazy or very rich to use a cost-based contract that allowed the builder to spend whatever he or she wanted, with a guaranteed profit on top. Instead, in the commercial world, a contractor has to keep down costs, or the expected profits will drop, or even disappear.
The new enthusiasm for price-based contracting had perfect timing to mesh with the new buzzwords of adopting best commercial practices and privatization popularized by the Clinton-Gore Administration and the Congress in the 1990s. Unfortunately, though, what Acquisition Reform began pushing was price-based commercial contracting without the normal constraints, appropriate incentives, and oversight. Price-based contracting does not work if it just means accepting whatever price a contractor asks.
Acquisition Reform has interfered with keys to getting good price-based contracts - the government's ability to bargain hard, to get the information it needs from a contractor to verify that prices are fair, and to analyze costs to make sure they are based on what things should cost, not what they did cost before, which may have been illegitimate itself. This is nothing new - the procurement system was documented suppressing government access to contractor cost data at least three decades ago. (see Appendix D) But now the effort to blind the government is much broader and has progressed much farther.
Above all, good price-based commercial contracting relies on a healthy level of competition. Yet many of the overpricing problems that have come to light under the new "commercial" Acquisition Reform rules involve inadequate competition. Much of the savings obtained in the 1980s were attributable to strengthened competition, including techniques such as "breaking out" the purchase of component parts from the prime contractor, who often does not make the parts, but purchases them from subcontractors and adds a large markup. Acquisition Reform's failure to promote adequate competition has been sorely compounded by the Clinton Administration's zealous promotion and subsidy of mergers in the defense industry, 18 which has drastically reduced the number of competitors in each sector of the industry.
It is only the lavish, unquestioning kind of price-based contracting that industry wants. But if Acquisition Reform is to work for the taxpayer and not solely for private contractors, it will have to adopt the normal kind of commercial price-based contracting, the kind that is not subservient to industry, but rather corroborates industry claims in a non-adversarial but informed fashion.
The Clinton-Gore Administration From its beginning, the Clinton-Gore Administration has pushed for changes to make things easier for contractors through its Acquisition Reform program in the Defense Department. The initiative was the culmination of a long process of working closer with industry and its campaign contributors undertaken by the Democratic Party when it began targeting corporate campaign contributions more aggressively in the 1980s.
The defense industry succeeded beyond its wildest dreams in winning endorsement of its proposals after the 1992 presidential election. Their plans proved to be in the right place at the right time when Vice President Gore was looking for new changes to make through his Reinventing Government initiative. Industry wishes were compiled by a Congressionally-created committee known informally as the "Section 800 panel," which was industry-dominated. 19 The panel's report was completed soon after the Clinton-Gore Administration took office. Its recommendations helped shape the Reinventing Government plan, which was put together under a tight deadline and needed new proposals quickly.
The approach of the Reinventing Government initiative was to blame the very procedures that were put in place to prevent waste and fraud, saying they were actually adding to the problem. As the first "National Performance Review" in September 1993 stated:
"In recent years, our national leaders responded to the growing crisis with traditional medicine. They blamed the bureaucrats. They railed against "fraud, waste, and abuse." And they slapped ever more controls on the bureaucracy to prevent it.
But the cure has become indistinguishable from the disease. The problem is not lazy or incompetent people; it is red tape and regulation so suffocating that they stifle every ounce of creativity." 20
Cutting out red tape is an undeniably worthy goal, and the National Performance Review identified many areas for improvement. The original report acknowledged that protections were usually put in place for good reason, but argues they got out of control:
"But not one inch of [government] red tape appears by accident. In fact, the government creates it all with the best of intentions ....
Because we don't want employees or private companies profiteering from federal contracts, we create procurement processes that require endless signatures and long months to buy almost anything."21
The difficulty in cutting red tape comes in deciding what really is red tape, and what are vital protections to prevent waste. Unfortunately, the defense industry took the wisdom of the Reinventing Government campaign and pushed it much too far, persuading its allies in Congress and the Administration to apply it where it benefits them alone. The industry has pushed to apply liberalized rules for "commercial" products to non-commercial products too - for example in attacking the Cost Accounting Standards, which apply only to non-commercial products.
If there is a common element to the various defense "Acquisition Reform" initiatives, it might be a reliance on trusting contractors to do the right thing, rather than keeping an eye on them with close oversight. The evidence is beginning to mount that -- as might be expected with reforms that weaken the government's ability to discover, correct, and deter contractor abuses -- these elements of Acquisition Reform are backfiring.
Receiving industry's views is necessary, as long as the relationship does not become too close, and government does not start working for private industry's interests rather than the public's interest. Just one example of how closely industry is involved in developing policy for the Clinton Administration is provided by a case of having industry representatives on the distribution list "for your review and coordination" of a government internal policy review. (See Appendix E)
In building their case for reducing oversight, contractors have claimed that the rules are excessively burdensome, and the Defense Department argues that, as a result, a lot of companies do not want to contract with the government. But the Department's claim about deterred companies is not very persuasive: leading the lobbying charge of contractors against these sensible rules are the largest existing defense companies, who have shown little reluctance to bid for government contracts - including Lockheed Martin, Northrop Grumman, Raytheon, Boeing, and associations that represent the major defense contractors, such as the Aerospace Industries Association. If the changes were really to benefit up-and-coming new competitors in the defense industry, why would the existing contractors push the changes so hard? The Defense Department has mentioned few companies that are refusing to do business with the government.
Furthermore, the defense industry has been highly profitable recently compared to other industries, raising questions about the claims that defense work is so burdensome, unprofitable, and unappealing that companies are deterred from doing it. According to a PaineWebber report, "Profit margins in the defense industry are at the highest levels in history; operating margins have increased from 6% in 1990 to over 12% in 1997." 22
The Administration has touted billions of dollars of savings from Reinventing Government and Acquisition Reform, saying they overshadow the new stories of overpriced spare parts. But even those claims have been challenged in a recently-released General Accounting Office (GAO) report, which points out substantial unsupported and double-counted "savings" in its examination of some of the claims. The GAO's conclusion regarding the claims of the National Performance Review (NPR), as the Reinventing Government effort is also known, was: "NPR claimed savings from agency-specific recommendations that could not be fully attributed to its efforts. OMB generally did not distinguish NPR's contributions from other initiatives or factors that influenced budget reductions at the agencies we reviewed." 23
The Congress The Administration's efforts got a boost when anti-regulation sentiment swept the Congress after the 1994 election. Congress expanded the Administration's initiatives with the Federal Acquisition Streamlining Act of 1994 and the Federal Acquisition Reform Act of 1996 (known as the Clinger-Cohen Act - one of its sponsors, Senator William Cohen, soon became Secretary of Defense.) (See Appendix F for a summary of legislative changes.)
The new laws made it easier for the government to buy "commercial" items, but they ended up making it too easy, by defining "commercial" too broadly. The original idea was to ease the government's ability to buy "off-the-shelf" items whose prices could be trusted because they were set by a free market. But the definitions are so broad that "sole-source" items bought from just one company, or items bought by the government alone, can count as commercial items and avoid normal rules. Items such as the C-130J military transport aircraft - a far cry from simple items like ashtrays, bolts, and hammers - have been declared "commercial" purchases.
In practice, contractors can claim a wide variety of products are "commercial" in order to stop government contracting officials challenging them on their high prices. A DOD Inspector General investigation found in one case that, "the contractor has declined to offer prices or provide cost data. The contractor is now claiming all the spare parts are commercial items, thus making it difficult, if not impossible, for DLA [Defense Logistics Agency] to negotiate fair and reasonable prices for the sole-source spare parts." 24
The laws allow contractors to sell "commercial" items without having to provide or certify cost and price data to prove that their prices are fair. The problem is that there is not always a single true "commercial price" to rely on if cost data is denied. In particular, so-called "catalog prices" or "list prices" sometimes are not the best commercial prices available. Discounts are usually available for large orders, for example, and the government often makes very large orders yet cannot use its purchasing power under the new system.
Acquisition Reform - Not Really Adopting the Free Market Acquisition Reform is drastically reducing access to cost data, reducing the number of government oversight personnel, and discouraging proactive price negotiating. Acquisition Reform proponents apparently believe that declaring something "commercial" creates market forces out of thin air - so that oversight is no longer needed and all the old rules and procedures can be thrown out.
An element of Acquisition Reform is that it is being used to discourage contracting officers from aggressively negotiating for discounts below "list" and "catalog" prices. There are various reasons why discounts from list prices may be justified, but the most basic is simply a discount for large purchase volumes. Again, this practice is not only a common large commercial firm practice, but also something almost every consumer shopper is familiar with - if you buy in bulk, you pay a lower price.
A simple analogy from our daily lives also illustrates that "commercial" prices are not set in stone. As most car buyers know, you do not necessarily have to pay whatever price the dealer puts on the sticker. Consumers trying to save money find out the "dealer invoice" price - that is, the seller's cost data - and can use that to bring down the exorbitant sticker price. Acquisition Reform, however, pretends that consumers and companies in the commercial marketplace do not gather cost data, and so it limits the government's ability to get the best out of commercial markets.
A June 1999 General Accounting Office study has found that under the new policies and procedures, government contracting officials were not challenging contractors' prices sufficiently:
"The price analysis performed by contracting personnel were often too limited to ensure that prices were fair and reasonable. For example, some contracting personnel believed that when the offered price was the same as the catalog or list price, it could be considered a fair and reasonable price. In several cases, contracting personnel did not use pertinent historical pricing information contained in contract files that should have raised questions about the reasonableness of offered prices. ... Finally, many contracting officers were not documenting in the contract file how they determined that a price previously paid for an item was fair and reasonable and, therefore, could be relied on in evaluating the currently offered price." 25
The legislation and the Administration's policy have blinded contracting officials: when the officials are not buying "off the shelf" items where prices are truly set in the commercial marketplace, they are effectively restricted (and subtly discouraged) from negotiating down from so-called "commercial" prices offered by defense contractors. 26At the same time, contractors no longer have to provide certified cost information to prove that their prices are fair, even when the items are being acquired on a sole-source basis. A DOD IG investigation found that:
"Acquisition reform legislation and the FAR [Federal Acquisition Regulation] still provide that contracting officers shall require information other than cost or pricing data which includes uncertified cost or pricing data when necessary to determine price reasonableness for commercial items, but there is a strong DoD preference not to use that mechanism and the Government has not asserted its right to have the data." 27[Emphasis added.]
Acquisition Reform defenders seem to pick and choose which parts of "commercial practices" to adopt. In particular, they have discouraged gathering cost data from suppliers, even though it is a practice often followed by large commercial companies. Large companies that buy from small companies have the leverage and the "market power" to get the smaller company to prove that its prices are reasonable. So should the government.
In addition to changing the rules, Acquisition Reform has used a variety of bureaucratic changes to reduce monitoring of the defense industry. The following sections look in more detail at how the Administration has made large-scale cutbacks in government personnel who negotiate, monitor, and oversee defense contracts.
Monkeying with Oversight: Hear No Evil, See No Evil, Speak No Evil A deep reduction in the number of auditors, investigators, and other government personnel who oversee defense contractors is underway. Congress has cut budgets of oversight agencies, and in 1994 ordered the elimination of 272,900 positions throughout the government over several years.28 The likely cost of this reduced oversight will be more fraud and higher prices for the government. Until contractors improve their performance record and eliminate fraud, oversight remains crucial for protecting the public purse. DOD Inspector General Eleanor Hill noted in 1998, "As personnel reductions in the acquisition workforce have occurred, we have also seen reduction in programs for fraud prevention, detection, and reporting." 29
The problem with simply trusting defense corporations - "contractor self-oversight" and "contractor self-governance," as it has been called - is that the contractors have not yet earned that trust. As the DOD IG says:
"While we understand the many benefits of the new emphasis on Government/industry teamwork, the Department should not assume that procurement fraud no longer occurs. To the contrary, our criminal investigators report that their proactive undercover efforts regularly reveal significant fraudulent activity. ... Many advocates of drastic changes in Government acquisition practices are unaware of, or choose to ignore, the fact that procurement fraud remains a threat to the DoD and the U.S. taxpayer." 30(Emphasis added.)
A report by the Project On Government Oversight found that the defense industry returned more than $850 million to the government just to settle fraud cases under the False Claims Act from 1994 to 1996. 31
Penny Wise, Pound Foolish Investment in oversight performed by agencies such as the Defense Contract Audit Agency, the Defense Contract Management Command, the DOD Inspector General's office, and the General Accounting Office produces a highly favorable return for the taxpayer. But large reductions in the DOD acquisition workforce and in these agencies in particular have already taken place, and more are planned. For example:
Defense Contract Audit Agency (DCAA) - Conducts audits of Department of Defense contracts.
"We used to get hundreds of [criminal case] referrals from DCAA. Now I think I can count them on one hand." - William Dupree, head of the Defense Criminal Investigative Service. 32
Saves almost $10 for each dollar invested. 33 Produced documented savings of $3.7 billion and an additional $2 billion in unallowable costs that contractors would otherwise have charged in 1997. 34
Staff positions cut by 19% from FY 1993 to FY 1997. 35 Scheduled to suffer an additional loss of more than 3,000 staffers, a 44% cut, from FY 1990 to FY 2002. 36
Defense Criminal Investigative Service (DCIS) - Part of the DOD Inspector General's office, detects, investigates and prevents fraud, waste, abuse, and other improper acts in the Defense Department.
"... there aren't any inspectors anymore. Because we're 'working with industry.' ... That's part of the problem: where will it unfold and how will it unfold if you've got the government almost in concert with the contractor?" - William Dupree, Defense Criminal Investigative Service 37
Recovered $466 million in FY 1996-97 fraud investigations. 38
Overall DOD Inspector General staff, which includes Defense Criminal Investigative Service, cut 21% from FY 1994 to FY 1997. 39 Planned cuts of 35% from FY 1995 to FY 2001, including a 37% cut in auditors and 26% in investigators. 40
Defense Contract Management Command (DCMC) - Manages defense contracts, including analysis, review, fraud investigation, and quality assurance assessments of contracts.
"Instead of workforce adjustments being a logical consequence of business process reengineering, the personnel reductions appear to have become a reform goal in and of themselves." - Eleanor Hill, Department of Defense Inspector General 41
Referrals of fraud cases by the Defense Logistics Agency, which includes the Defense Contract Management Command, have dropped by 47% since 1995. 42
80% cut in personnel at the Defense Logistics Agency's Office of General Counsel responsible for pursuing fraud cases.43 Total DCMC personnel cut 27% from FY 1993 to FY 1997. 44 Quality assurance staff at DCMC cut 54% from FY 1990 to FY 1996. 45
General Accounting Office (GAO) - Audits, investigates, and assesses defense and other government programs.
GAO's work "contributes to many legislative and executive branch actions that result in significant financial savings and other improvements in government operations." - GAO's 1999 "Status of Open Recommendations" report
Examples of GAO savings: "six GAO products on concurrency [buying designs while still testing them] and risk in the F-22 program were important influences on DOD actions to decrease concurrency, which included reducing the number of initial production aircraft from eight to six annually resulting in measurable savings of about $1.7 billion." Similarly, "the House and Senate Committees on Appropriations conferees reduced DOD's fiscal year 1998 operations and maintenance request by $199.3 million, based on funds we identified to be in excess of requirements." 46
GAO has been chopped a third in size from FY 1992 to FY 1996, losing almost 2,000 staffers. 47
Cost Accounting Standards Board (CAS Board) - Sets basic accounting rules for contractors covering $125 billion per year in noncommercial contracts - about $90 billion in defense.
"If anything, the risks may be greater today because there is such market dominance by a few very large suppliers. In this environment, getting cost information and maintaining audit rights is a prudent business practice. Failure to do so will be very costly for the Department and ultimately the taxpayer." - Eleanor Hill, Department of Defense Inspector General 48
Estimated to save the government over $6 billion a year. 49
The Office of Management and Budget (OMB) has made a variety of bureaucratic changes to weaken the Board and its small staff, and legislation to make further changes is under consideration in Congress. 50 At Congressional direction, a Panel has reviewed the Board. (See Appendices G and H.) The Panel suffered from blatant conflict of interest - half of its members were from industry, including Northrop Grumman, which has paid $3.3 million in recent years to settle fraud claims against it under the False Claims Act, 51 and AlliedSignal, which was recently found by a Defense Department Inspector General investigation to have grossly overcharged the government for spare parts. Not surprisingly, the Panel recommended weakening of the Board's Standards. (See Appendix I)
It does not normally make sense to cut back on highly profitable activities. Drastically cutting oversight personnel blinds the government in its oversight of tens of billions of dollars of contracts each year. This serves only to make the government and the taxpayer highly vulnerable to exploitation by an industry with a blemished track record. There can be non-monetary costs, too: in August 1999 a draft GAO report found that the Defense Security Service, which conducts background checks for security clearances, had a backlog of half-a-million cases. Officials cited as one cause the Administration's Reinventing Government personnel cutbacks at the agency - since 1989 the staff was slashed from 4,080 employees to 2,466. 52
Unfortunately, Vice President Gore's National Performance Review regards oversight personnel as part of the problem:
"As we pare down the systems of overcontrol and micromanagement in government, we must also pare down the structures that go with them: the oversized headquarters, multiple layers of supervisors and auditors, and offices specializing in the arcane rules of budgeting, personnel, procurement, and finance. We cannot entirely do without headquarters, supervisors, auditors, or specialists, but these structures have grown twice as large as they should be." 53
But auditors, investigators, and other oversight personnel - who produce large net savings for the taxpayer - should not necessarily be lumped together with general management personnel. Again, Reinventing Government plans took steps in the right direction, but then were pushed too far.
The ideological goal of reducing oversight to work more "in concert" with the defense industry may explain the rush to cut staffs without doing sufficient monitoring and assessment of whether more oversight can be done with less personnel. The situation is made all the more dire by the increasing demands being put on oversight agencies. In the next few years they will have to deal with:
- A planned increase in the amount of spending on procurement contracts.
- New requirements to balance the federal government's accounting books.
- A newly-mandated outsourcing of work formerly performed by the government, which will increase the number of contracts, and hence management and oversight requirements.
- A hampering of competition by the recent wave of defense mega-mergers. Competition used to be a silent ally in keeping contractors from playing games with the rules.
Paying for Luxury Hotels Again The cost principles are used, for example, to determine which costs that a contractor wants to bill to the government under a contract are "allowable," or payable (e.g., salaries, material), and which are "unallowable" (e.g., costs of alcoholic beverages, club memberships).
Publicly, this streamlining is supposed to be about "Civil-Military Integration" - the merger of defense and commercial industries - which is supposed to bring technical and cost benefits. However, this latest initiative merely removes long-standing ceilings placed on defense contractor travel and relocation costs billed to the government. These ceilings - which ironically are based on commercial indices - limit contractors to the same reimbursements that Federal employees can receive for hotels, meals, and moving expenses.
Since the amounts that Federal employees may be reimbursed are set at standard commercial rates, however, contractors are already limited to operating as the commercial world does. The new initiative, however, wants to eliminate any constraints, and let contractors charge even more than commercial standards. The ceilings were originally put in place to curb abuses such as claims for luxury hotel suites and excessive meal costs while performing government contracts. (See Appendix J)
If the cost principles are weakened, horror stories about luxurious executive lifestyles at taxpayer expense are likely to come up once again. A recent GAO report notes how contractors charging travel rates much higher than the Federal standards contributed to excessive Department of Energy travel expenditures. Acquisition Reform should not be about making it easier for corporate officials to bill the taxpayer for $300-a-night hotel rooms. 55
Accepting Data That Need Not Be "Current, Accurate, and Complete" A final example of the heedless attitude prevalent in the Acquisition Reform era is that the Federal Acquisition Streamlining Act and the Clinger-Cohen Act now allow use of cost or pricing data that oftentimes is not required to be "certified." Such uncertified contractor cost or pricing data is that which "need not be current, accurate, and complete," and is therefore far less useful for determining whether prices charged to the government are fair or not.
Accuracy of cost information is not a trivial matter: yet another investigation by the DOD Inspector General, this time a not-yet-released study, was reported in June 1999 to have found millions of dollars worth of overcharging by AlliedSignal - and attributed them to the flawed, inaccurate, and outdated pricing information provided by the company. The IG reportedly concluded that at least $53 million could be saved through the year 2005 with better data. 56
In an Orwellian attempt to confuse the situation, uncertified cost data is now referred to in the government as "information other than cost or pricing data" and certified data is referred to as "cost or pricing data." Since uncertified data apparently cannot be relied upon, when submitting cost data, contractors should be required to certify the data.
The $435 Hammer That Won't Go Away Rocked by the spare parts horror stories of the 1980s, the Pentagon searched for some cover. They found it in the theories of a Harvard professor, Steven Kelman. Professor Kelman's theory was that the spare parts horror stories were a myth, and were caused by an accounting procedure called the "equal allocation of overhead." At the time, however, the equal allocation claim was exposed as bearing no relationship to reality.
Now, more than a decade later, Acquisition Reform advocates are turning to the same hoax, and astonishingly, Professor Kelman shows up as a major architect of Acquisition Reform - he was head of OMB's Office of Federal Procurement Policy during the early Clinton Administration. A December 1998 National Journal article quoting Kelman led with the alleged revelation that a famous defense scandal story from the Reagan years - the $435 hammer - was a "myth." By implication, all the other horror stories of overpricing were myths too. (See Appendix K)
According to this hoax, the outrageous overcharging of the day had a simple and innocuous accounting explanation: simple items like hammers had an amount of company "overhead" expenses allocated to them equal to the amount allocated to much more complex and expensive items. Allocating large amounts of overhead "equally," rather than in proportion to actual value, would naturally lead to bizarre outcomes like $435 hammers.
Unfortunately this convenient explanation was simply not backed up by the facts: contractors did not use such bizarre procedures - in fact they would not be permitted by Cost Accounting Standards. In the 1980s the Project On Government Oversight (then known as the Project on Military Procurement) worked extensively on Defense Department overcharging scandals and rebutted the equal allocation hoax when it first appeared. Simple examination of the data showed that allocation of the alleged equal amount of overhead as Kelman claimed would mean that many cheaper items found on contract price lists would actually have a negative price once the "overhead" was taken away. (See Appendix L) The Project On Government Oversight pointed out that the proponents of the hoax actually never produced cases of the "equal allocation of overhead," and in fact the Air Force was forced to admit there were no cases. (See Appendices M and N)
Pentagon whistleblower Ernest Fitzgerald traces the history of the "equal allocation" hoax in his 1989 book The Pentagonists. Fitzgerald presciently foretells that, "Doubtless in the future other writers as gullible as George Will and Professor Kelman will front for the Pentagon again." Who would have known that the original author of this hoax would return in the White House more than a decade later?
The Solution: How to Stop De-Inventing the Wheel Acquisition Reform is not necessarily what it sounds like - it is not reform in the old sense of tightening protections against contractor overcharging. To the contrary, it has focused on weakening or bypassing controls - and claiming that the free market will protect the government. But the real world is more complicated, and policies should be revised to take into account the complexities of the free market, and the necessary and desirable contracting and accounting procedures that aid the government in negotiating with large and powerful defense contractors. The following proposals, including suggestions for legislative changes, could help ensure that the new reforms do not come at the cost of crippling previous reforms:
Restore meaning to the definition of "commercial." Commercial status should only apply to items that are bought and sold widely in true free market. This would require:
- Restore the definition of commercial as actual sale of specific items to the general public, rather than the loosened definition of a commercial item as one not necessarily sold to the public, but merely "offered for sale."
- Also, restore the definition of commercial to mean a large free market -- one that has a substantial level of sales. The Federal Acquisition Reform Act (Clinger-Cohen Act) watered down standards defining a substantial level of commercial sales, and if there is not a large market with numerous buyers and sellers, the "prices" set by contractors should not necessarily be relied upon for government purchases.
- Finally, restore the definition of "competitive bidding" to require at least two bidders. The current alternative says that there is competition even if there is only one bid, as long as others could have bid. The phrase "sole-source commercial" is also an oxymoron - commercial exemptions should not apply when the supplier has a monopoly.
Restore the use of cost or pricing data where prices are not set by a true free market. Since commercial firms large enough to have "buying power" collect cost data from their suppliers, allowing the government to do so also is merely following best commercial practice. The data obtained should be "certified" data.
Preserve funding for the auditors, investigators, and rule-setting Boards like the Cost Accounting Standards Board. Many of the oversight officials save us far more than they cost. To keep cutting back on their numbers is to throw away money.
Defend the False Claims Act against industry assaults. The False Claims Act provides increased protections against fraud. It continues to be a target for industry lobbying. It, and the other reforms put in place to prevent abuses, should be strengthened and not weakened.
Improve price-based contracting by increasing competition and reversing the trend of mergers leading to fewer competing contractors. Ensure that adequate competition exists wherever possible, and where it cannot, negotiate vigorously based on cost analysis of what products should cost now, not extrapolations of what was paid (or overpaid) in the past.
If the Administration and Congress are serious about using Acquisition Reform to adopt best commercial practices, they need to focus more on the most basic ones - such as testing and developing products fully before buying them - and to give government officials the ability to make use of all best commercial practices, even when it means that defense contractors do not get everything they want.
Following Pentagon acknowledgment of "readiness" problems and after the war in Kosovo, defense budgets - and procurement spending - are being increased sharply. For this reason it is especially imperative for us not to forget what we already know about good acquisition reform - there is no need to re-invent the wheel. If we do forget, the budget surpluses the Defense Department is enjoying will quickly be frittered away on overpriced weapons and parts, and the taxpayers' money will, once again, be wasted.